As I sit in my office this first week in January after a foot of snow has fallen across most of the county, I am watching the birds searching for a spot of dry ground to find food. Sometimes we feel like those birds, seeking answers in a world that seems as unpredictable as the weather.
2021 was a strange year. COVID variants, bare shelves, job openings, and inflation were the stories that dominated the headlines. Through all the unpredictability, the stock market kept going higher before volatility hit in the last quarter of the year. You probably felt the whiplash as the markets were up one month only to be down the next.
Yes, unpredictability was the story of 2021, but will it be the same in 2022?
The short answer is yes for unpredictability, but don’t expect the story to be the same. In 2022, it is likely to be the Federal Reserve and rising interest rates in a slowing economy.
Ultra-low interest rates and government stimulus in the form of COVID checks were the fuel that kept the economy and markets moving forward in 2021. That same fuel will now force the Fed to react to the consequences of higher inflation. Raising interest rates is the main weapon the Fed uses to combat inflation. And rising rates alongside a potential slowdown in economic activity could mean trouble ahead.
On the bright side, I remain an eternal optimist and see opportunities ahead in 2022. Defensive sectors of the economy such as consumer staples, real estate, and utilities should hold up well. I continue to believe that technological innovations will drive our society and economy forward for years to come. Who would have imagined 30 years ago that we would hold computers in the palm of our hands and communicate with people all over the globe in seconds? Whether we like it or not, change will always be with us, and innovative technology will lead the way in making our lives better.
I believe that now is the time to play some defense while always looking for opportunities that will no doubt come our way. If you are in our model portfolios, you will notice that we have been very busy during this first week of the year. Expect to receive rather extensive trade confirmations as we complete a full rebalance of your portfolio. We do this to prepare for the road ahead which is likely to bring opportunities that are altogether different from the ones we experienced last year.